The Franchise Memorandum

In Coldwell Banker Real Estate, LLC  v. Brian Moses Realty, Inc., 2010 U.S. Dist. LEXIS 93827 (D.N.H. Sept. 8, 2010), a New Hampshire federal court last month granted franchisor Coldwell Banker’s motion for summary judgment on its noncompete claim against a former franchisee, finding that the franchisee had clearly violated the in-term covenant not to compete in its franchise agreement by engaging in a competing Re/Max Properties real estate business. Although the court also granted Coldwell Banker’s motion for summary judgment on all counterclaims, factual disputes regarding the amount of contractual damages and the likelihood of confusion from misuse of the trademarks precluded summary judgment in favor of Coldwell Banker on its nonpayment and trademark infringement claims.

At issue was the “merger agreement” that the franchisee signed with a competing Re/Max unit operating in the same market. Under the agreement, the franchisee combined its real estate agents and business with Re/Max’s, and transferred to Re/Max all of its customers, listings, and pending sales. Brian Moses, the sole owner of the franchise, also agreed to provide certain training, recruiting, limited management, and referral services to Re/Max, but not to continue to list or sell properties. In granting summary judgment to Coldwell Banker on its noncompete claim, the court determined that Moses’ ongoing role with Re/Max was irrelevant given that the merger of the franchisee’s real estate business with Re/Max was “explicitly designed” to increase Re/Max’s market share in the relevant geographic area. Finding ample evidence of diverted business—a violation of the noncompete clause in the franchise agreement—the court noted that Re/Max received commissions, marketing fees, and service costs under the agreement from any pending or future sales originating from the Coldwell Banker franchise. Interestingly, the franchise agreement did not contain a post-term covenant not to compete; thus, the court made clear that the franchisee only violated the covenant not to compete from the date it abandoned its franchise and joined Re/Max until the date that Coldwell Banker eventually terminated the franchise agreement. The court held that it could grant judgment as to liability on Coldwell Banker’s breach of contract claim for abandonment without having to determine the exact amount of damages.

In granting summary judgment to Coldwell Banker on the franchisee’s counterclaims, the court rejected several arguments commonly raised by franchisees. As to the franchisee’s claim that it was fraudulently induced to sign the franchise agreement based on a misrepresentation as to the agreement’s expiration date, the court found that the franchisee could not reasonably rely on alleged prior statements if the franchise agreement itself was clear and unambiguous. The integration clause, the court held, further demonstrated that “the contract speaks for itself.” The court then rejected the franchisee’s negligent misrepresentation claim, finding it not only barred by the statute of limitations but also meritless because Coldwell Banker owed no duty to the franchisee, even if it knew the franchise “was a bad investment.” The franchisee’s unjust enrichment claim failed as a matter of law because the alleged obligation of Coldwell Banker to refer business to the franchisee was absent from the plain language of the franchise agreement. Finally, the court found that an unfair trade practices claim for “unfair, immoral, unethical or oppressive conduct” under New Hampshire law could not survive because it had already denied the franchisee’s other counterclaims, which were similar in nature.